Law and Economics Exam 1 Spring 2024

Common law is practiced where?

a. France

b. England

c. The United States

d. All of the above

e. B and C but not A

e. B and C but not A

Which of the following is likely to exhibit positive externalities?

a. National defense

b. A pig farm that creates a bad odor for several miles in any direction

c. A person smoking cigarettes inside their own house, where they live alone

d. An airport that has loud airplane takeoffs and landings near a neighborhood

a. National defense

What does it mean if an economist says a good is a “private good”

a. It is rivalrous and non-excludable

b. It non-rivalrous and non-excludable

c. It is non-rivalrous and excludable

d. It is rivalrous and excludable

e. It is owned by the government

d. It is rivalrous and excludable

Recall the two fox hunting rules: (1) “the guy who established the fox hunt gets the fox, and (2) “the guy who kills the fox gets it.”  Which of the following is true?

a. “The guy who established the fox hunt gets the fox” is a “bright line” property rule, which makes property rights clear and bargaining easier

b. “The guy who kills the fox gets it,” while more complicated to enforce, avoids the incentive to infringe upon other people’s hunts (and is thus more efficient) 

c. “The guy who kills the fox gets it” is a “bright line” property rule, which makes property rights clear and bargaining easier

d. A and B are both true

e. None of these are true

c. “The guy who kills the fox gets it” is a “bright line” property rule, which makes property rights clear and bargaining easier

Questions 5-7 refer to the following: Adam, who lives in a small town, has a 1957 Chevy convertible in good repair. The pleasure of owning and driving this car is worth $4000 to Adam. Blair, who has wanted the car for years, inherits $7000 and decides to try to buy the car from Adam.  After inspecting the car, Blair decides that the pleasure of owning it is worth $3000 to her. A government agent taking Adam’s car and giving it to Blair (with no money changing hands) would be which of the following

a. A Kaldor-Hicks improvement

b. A Pareto improvement

c. A Coaseian improvement

d. None of the above

e. Both A and B

d. None of the above

Questions 5-7 refer to the following: Adam, who lives in a small town, has a 1957 Chevy convertible in good repair. The pleasure of owning and driving this car is worth $4000 to Adam. Blair, who has wanted the car for years, inherits $7000 and decides to try to buy the car from Adam.  After inspecting the car, Blair decides that the pleasure of owning it is worth $3000 to her. Which of the following is the most likely outcome of Blair’s attempt to buy Adam’s car?

a. Blair will buy the car from Adam for $5000

b. Blair will buy the car from Adam for $8000

c. Blair will buy the car from Adam for $4000

d. Blair will buy the car from Adam for $3500

e. Blair will not buy the car from Adam

e. Blair will not buy the car from Adam

Questions 5-7 refer to the following: Adam, who lives in a small town, has a 1957 Chevy convertible in good repair. The pleasure of owning and driving this car is worth $4000 to Adam. Blair, who has wanted the car for years, inherits $7000 and decides to try to buy the car from Adam.  After inspecting the car, Blair decides that the pleasure of owning it is worth $3000 to her.  How much cooperative surplus is available to Adam and Blair?

a. $0

b. $1000

c. $2000

d. $3000

e. $4000

a. $0

I am in the market for a Globe Warnicke barrister cabinet (an antique piece of furniture).  The cost of driving around to flea markets hoping to find one for sale is which type of transaction cost?

a. Search cost

b. Bargaining cost

c. Enforcement cost

d. Exchange cost

e. None of the above

a. Search cost

Suppose that the seller and I reach an agreement on price: $400.  We also agree that I will pay her $40 per month for 10 months. The cost to her of collecting these payments is which type of transaction cost?

a. Search cost

b. Bargaining cost

c. Enforcement cost

d. Exchange cost

e. None of the above

c. Enforcement cost

Which of the following is most likely to be excludable?

a. Clean air

b. Sunlight

c. A pint of ice cream

d. A and B, but not C

e. None of these are likely to be excludable

 

c. A pint of ice cream

 Which of the following statements is true?

a. The normative Hobbes theorem says “Structure the law so as to minimize transaction costs and lubricate bargaining.”

b. The normative Coase theorem says “Structure the law so as to minimize transaction costs and lubricate bargaining.”

c. The normative Kaldor-Hicks theorem says “Structure the law so as to minimize transaction costs and lubricate bargaining.”

d. The normative Coase theorem says “It doesn’t matter how you structure the law, private agreements will always lead to efficient outcomes.”

e. The normative Coase theorem says “Structure the law so as to minimize the harm done by failures in private agreements”

b. The normative Coase theorem says “Structure the law so as to minimize transaction costs and lubricate bargaining.”

What of the following are required to have rational preferences?

a. Preferences must be complete

b. Preferences must be commutative

c. Preferences must be reflexive

d. All of the above

e. A and C only

e. A and C only

Which of the following statements is true?

a. All Kaldor-Hicks improvements are also Pareto improvements

b. All Pareto improvements are also Kaldor-Hicks improvements

c. All Pareto improvements are not Kaldor-Hicksimprovements, but could be made into Kaldor-Hicks improvements with a transfer of cash

d. All Kaldor-Hicks improvements are not Pareto improvements, but could be made into Pareto improvements with a transfer of cash.

e. B and D are both true

e. B and D are both true

Which of the following is a difference between Kaldor-Hicks and Pareto improvements?

a. Kaldor-Hicks improvements can make society as a whole worse off as long as some individuals gain, whereas Pareto improvements must make society as a whole better off

b. Pareto improvements can make society as a whole worse off as long as some individuals gain, whereas Kaldor-Hicks improvements must make society as a whole better off

c. Pareto improvements can create some winners and some losers, whereas Kaldor-Hicks improvements must be “win-win”

d. Kaldor-Hicks improvements can create some winners and some losers, whereas Pareto improvements must be “win-win”

e. A and C

d. Kaldor-Hicks improvements can create some winners and some losers, whereas Pareto improvements must be “win-win”

Questions 15-16 refer to the following situation. Imagine that Sally and William are neighbors, who live close to each other, but there is no one else nearby.  William would like to have a loud party which would keep Sally awake.  Sally values getting a good night’s sleep at $150 per night.  William and his guests value having the party at $200 (in total).  Which of the following statements are true?

a. William having the party is a Pareto improvement over having the party, if William pays Sally $175 to compensate her for not being able to sleep (if he does not pay her, it is not a Pareto improvement)

b. William having the party is a Kaldor-Hicksimprovement over not having the party, even if William does not pay Sally. 

c. William having the party is a Pareto improvement over not having the party, even if William does not pay Sally.

d. A and C

e. A and B

e. A and B

Questions 15-16 refer to the following situation. Imagine that Sally and William are neighbors, who live close to each other, but there is no one else nearby.  William would like to have a loud party which would keep Sally awake.  Sally values getting a good night’s sleep at $150 per night.  William and his guests value having the party at $200 (in total).  Is it efficient (in the sense used in our class) for William to have this party?

a. Yes, but only if he pays Sally

b. Yes, even if he does not pay Sally

c. No

b. Yes, even if he does not pay Sally

Questions 17-19 refer to the following: The market for used cars has two types of cars: high quality and low quality. Each type is equally common (each quality level represents ½ of the cars available for purchase on the used car market). Buyers are willing to pay $16,000 for a high-quality car and $4,000 for a low-quality car.  Sellers of a high-quality car would be willing to sell it for $14,000, and sellers of a low-quality car would be willing to sell it for $2,000.  Assume that both buyers and sellers are risk neutral, and that while the seller knows what quality of car s/he has, the buyer cannot tell the difference between high and low quality cars.  What is the buyer’s average valuation of these cars?

a. $15,000

b. $10,000

c. $8,000

d. $3,000

b. $10,000

Questions 17-19 refer to the following: The market for used cars has two types of cars: high quality and low quality. Each type is equally common (each quality level represents ½ of the cars available for purchase on the used car market). Buyers are willing to pay $16,000 for a high-quality car and $4,000 for a low-quality car.  Sellers of a high-quality car would be willing to sell it for $14,000, and sellers of a low-quality car would be willing to sell it for $2,000.  Assume that both buyers and sellers are risk neutral, and that while the seller knows what quality of car s/he has, the buyer cannot tell the difference between high and low quality cars.  What is the seller’s average valuation of these cars?

a. $15,000

b. $10,000

c. $8,000

d. $3,000

c. $8,000

Questions 17-19 refer to the following: The market for used cars has two types of cars: high quality and low quality. Each type is equally common (each quality level represents ½ of the cars available for purchase on the used car market). Buyers are willing to pay $16,000 for a high-quality car and $4,000 for a low-quality car.  Sellers of a high-quality car would be willing to sell it for $14,000, and sellers of a low-quality car would be willing to sell it for $2,000.  Assume that both buyers and sellers are risk neutral, and that while the seller knows what quality of car s/he has, the buyer cannot tell the difference between high and low quality cars.  Which of the following trades might reasonably occur?

a. High-quality cars at $15,000

b. Low-quality cars at $3,000

c. Average-quality cars at $9,000

d. All of the above might reasonably occur

e. A and B

b. Low-quality cars at $3,000

For questions [[20-27]], consider the following scenario: A farmer and rancher live close to each other.  Their property boundaries are well defined, but there is no physical boundary, so the rancher’s cattle may wander onto the farmer’s property and cause damage to the farmer’s crops.  Suppose that the farmer can build and maintain a fence around his crops for $50 per year, while the rancher can build and maintain a fence around his ranch for $100 per year.  Further suppose that if there is no fence, the rancher’s wandering cattle will cause the farmer $40 in lost profits each year.  Suppose that there are no transaction costs between the farmer and the rancher and that Coasian bargaining works.  If there are “farmer’s rights,” where does Coase predict the fence will be built?

a. Around the farmer’s crops

b. Around the rancher’s ranch

c. Around both the ranch and the crops

d. There won’t be a fence

d. There won’t be a fence

For questions [[20-27]], consider the following scenario: A farmer and rancher live close to each other.  Their property boundaries are well defined, but there is no physical boundary, so the rancher’s cattle may wander onto the farmer’s property and cause damage to the farmer’s crops.  Suppose that the farmer can build and maintain a fence around his crops for $50 per year, while the rancher can build and maintain a fence around his ranch for $100 per year.  Further suppose that if there is no fence, the rancher’s wandering cattle will cause the farmer $40 in lost profits each year.  Suppose that there are no transaction costs between the farmer and the rancher and that Coasian bargaining works.  If there are “rancher’s rights,” where does Coase predict the fence will be built?

a. Around the farmer’s crops

b. Around the rancher’s ranch

c. Around both the ranch and the crops

d. There won’t be a fence

d. There won’t be a fence

For questions [[20-27]], consider the following scenario: A farmer and rancher live close to each other.  Their property boundaries are well defined, but there is no physical boundary, so the rancher’s cattle may wander onto the farmer’s property and cause damage to the farmer’s crops.  Suppose that the farmer can build and maintain a fence around his crops for $50 per year, while the rancher can build and maintain a fence around his ranch for $100 per year.  Further suppose that if there is no fence, the rancher’s wandering cattle will cause the farmer $40 in lost profits each year.  Suppose that there are no transaction costs between the farmer and the rancher and that Coasian bargaining works.  If there are “rancher’s rights,” what is each side’s threat point? 

a. The farmer’s threat point is 0; the rancher’s threat point is -$40

b. The farmer’s threat point is 0; the rancher’s threat point is -$50

c. The farmer’s threat point is 0; the rancher’s threat point is -$100

d. The farmer’s threat point is -40; the rancher’s threat point is 0

e. The farmer’s threat point is -50; the rancher’s threat point is 0

d. The farmer’s threat point is -40; the rancher’s threat point is 0

For questions [[20-27]], consider the following scenario: A farmer and rancher live close to each other.  Their property boundaries are well defined, but there is no physical boundary, so the rancher’s cattle may wander onto the farmer’s property and cause damage to the farmer’s crops.  Suppose that the farmer can build and maintain a fence around his crops for $50 per year, while the rancher can build and maintain a fence around his ranch for $100 per year.  Further suppose that if there is no fence, the rancher’s wandering cattle will cause the farmer $40 in lost profits each year.  Suppose that there are no transaction costs between the farmer and the rancher and that Coasian bargaining works.  If there are “farmer’s rights” protected by damages, what is each side’s threat point? 

a. The farmer’s threat point is 0; the rancher’s threat point is -$40

b. The farmer’s threat point is 0; the rancher’s threat point is -$50

c. The farmer’s threat point is 0; the rancher’s threat point is -$100

d. The farmer’s threat point is -40; the rancher’s threat point is 0

e. The farmer’s threat point is -50; the rancher’s threat point is 0

a. The farmer’s threat point is 0; the rancher’s threat point is -$40

For questions [[20-27]], consider the following scenario: A farmer and rancher live close to each other.  Their property boundaries are well defined, but there is no physical boundary, so the rancher’s cattle may wander onto the farmer’s property and cause damage to the farmer’s crops.  Suppose that the farmer can build and maintain a fence around his crops for $50 per year, while the rancher can build and maintain a fence around his ranch for $100 per year.  Further suppose that if there is no fence, the rancher’s wandering cattle will cause the farmer $40 in lost profits each year.  Suppose that there are no transaction costs between the farmer and the rancher and that Coasian bargaining works.   If there are “farmer’s rights” protected by an injunction, what is each side’s threat point? 

a. The farmer’s threat point is 0; the rancher’s threat point is -$40

b. The farmer’s threat point is 0; the rancher’s threat point is -$50

c. The farmer’s threat point is 0; the rancher’s threat point is -$100

d. The farmer’s threat point is -40; the rancher’s threat point is 0

e. The farmer’s threat point is -50; the rancher’s threat point is 0

 

c. The farmer’s threat point is 0; the rancher’s threat point is -$100

For questions [[20-27]], consider the following scenario: A farmer and rancher live close to each other.  Their property boundaries are well defined, but there is no physical boundary, so the rancher’s cattle may wander onto the farmer’s property and cause damage to the farmer’s crops.  Suppose that the farmer can build and maintain a fence around his crops for $50 per year, while the rancher can build and maintain a fence around his ranch for $100 per year.  Further suppose that if there is no fence, the rancher’s wandering cattle will cause the farmer $40 in lost profits each year.  Suppose that there are no transaction costs between the farmer and the rancher and that Coasian bargaining works.  If there are farmers’ rights protected by damages, which of the following is the most likely outcome?

a. The rancher pays for the fence and makes and additional side payment of $25 to the farmer.

b. The rancher pays for the fence and makes and additional side payment of $50 to the farmer.

c. The rancher pays for the fence but does not make an additional side payment.

d. The rancher does not pay for the fence and pays the farmer $40.

e. The farmer does not build a fence and receives nothing from the rancher.

d. The rancher does not pay for the fence and pays the farmer $40.

For questions [[20-27]], consider the following scenario: A farmer and rancher live close to each other.  Their property boundaries are well defined, but there is no physical boundary, so the rancher’s cattle may wander onto the farmer’s property and cause damage to the farmer’s crops.  Suppose that the farmer can build and maintain a fence around his crops for $50 per year, while the rancher can build and maintain a fence around his ranch for $100 per year.  Further suppose that if there is no fence, the rancher’s wandering cattle will cause the farmer $40 in lost profits each year.  Suppose that there are no transaction costs between the farmer and the rancher and that Coasian bargaining works.   If there are ranchers’ rights, which of the following is the most likely outcome?

a. The rancher pays for the fence and makes and additional side payment of $25 to the farmer.

b. The rancher pays for the fence and makes and additional side payment of $50 to the farmer.

c. The rancher pays for the fence but does not make an additional side payment.

d. The rancher does not pay for the fence and pays the farmer $40

e. The farmer does not build a fence and receives nothing from the rancher.

 

e. The farmer does not build a fence and receives nothing from the rancher.

For questions [[20-27]], consider the following scenario: A farmer and rancher live close to each other.  Their property boundaries are well defined, but there is no physical boundary, so the rancher’s cattle may wander onto the farmer’s property and cause damage to the farmer’s crops.  Suppose that the farmer can build and maintain a fence around his crops for $50 per year, while the rancher can build and maintain a fence around his ranch for $100 per year.  Further suppose that if there is no fence, the rancher’s wandering cattle will cause the farmer $40 in lost profits each year.  Suppose that there are no transaction costs between the farmer and the rancher and that Coasian bargaining works.  Now suppose that the cattle cause $200 worth of damage.  If there is a farmer’s rights regime (protected by damages), which of the following is the most likely?

a. The rancher pays for the fence and makes and additional side payment of $25 to the farmer.

b. The rancher pays for the fence and makes and additional side payment of $50 to the farmer.

c. The rancher pays for the fence but does not make an additional side payment.

d. The rancher does not pay for the fence and pays the farmer $200.

e. The farmer does not build a fence and receives nothing from the rancher.

a. The rancher pays for the fence and makes and additional side payment of $25 to the farmer.

 Which of the following is one of the fundamental economic questions of property law?

a. What is the most efficient system of transferring ownership between people?

b. What is the socially optimal price of a piece of property?

c. How do we resolve disputes about property ownership?

d. What things may be owned?

e. Both C and D.

e. Both C and D.

Which of the following tends to lead to inefficiencies in markets?

a. The presence of many buyers and sellers in a commodity market?

b. Complete information on the part of buyers

c. Complete information on the part of sellers

d. The presence of taxes

e. All of the above cause inefficiencies

 

d. The presence of taxes

Questions 30-33refer to the following scenario: Suppose that two adjacent farmers are deciding whether to farm his own land, or to steal crops from his neighbor.  Suppose that planting and watering costs $10; the crops that either farmer can grow are worth $50, and stealing costs $5.  Note that if both farmers choose to steal (rather than to farm), there will be nothing to steal.  Which of the following payoff matrices describes the game?  Player 1’s payoff is listed first; Player 2’s payoff is listed second.

 

A	Player 2
Player 1		Farm	Steal
	Farm	0,0	-10,45
	Steal	45,-10	40,40

 

B	Player 2
Player 1		Farm	Steal
	Farm	40,40	-10,45
	Steal	45,-10	0,0

 

C	Player 2
Player 1		Farm	Steal
	Farm	0,0	45,-10
	Steal	-10,45	40,40

 

D	Player 2
Player 1		Farm	Steal
	Farm	40,40	45,-10
	Steal	-10,45	0,0

B

Questions 30-33refer to the following scenario: Suppose that two adjacent farmers are deciding whether to farm his own land, or to steal crops from his neighbor.  Suppose that planting and watering costs $10; the crops that either farmer can grow are worth $50, and stealing costs $5.  Note that if both farmers choose to steal (rather than to farm), there will be nothing to steal. What is the payoff from the Nash equilibrium?  (Player 1’s payoff is listed first)

a. (40,40)

b. (-10,45)

c. (45,-10)

d. (0,0)  

d. (0,0)  

Questions 30-33refer to the following scenario: Suppose that two adjacent farmers are deciding whether to farm his own land, or to steal crops from his neighbor.  Suppose that planting and watering costs $10; the crops that either farmer can grow are worth $50, and stealing costs $5.  Note that if both farmers choose to steal (rather than to farm), there will be nothing to steal.  How much total cooperative surplus is available to the Players, if they can coordinate?

a. 0

b. 10

c. 40

d. 80

d. 80

Questions 30-33refer to the following scenario: Suppose that two adjacent farmers are deciding whether to farm his own land, or to steal crops from his neighbor.  Suppose that planting and watering costs $10; the crops that either farmer can grow are worth $50, and stealing costs $5.  Note that if both farmers choose to steal (rather than to farm), there will be nothing to steal.  Now assume that the farmers come up with an idea to institute property rights.  They establish a system that would cost c to everyone who plays by the rules (farms), but would give a penalty P to anyone who steals. (Assume that if they enact this system, everyone who steals will get caught 100% of the time).  Which of the following values of P and c will work to achieve the cooperative outcome?

a. P = 2, c = 10

b. P = 7, c = 5

c. P = 10, c = 20

d. P = 20, c = 10

e. None of these values will achieve the cooperative outcome

d. P = 20, c = 10

 Which of the following is a normative economic statement?

a. The current unemployment rate is 3.7%

b. The government should increase taxes to reduce income inequality

c. The Federal Reserve increasing interest rates will lead to a reduction in inflation rates

d. All of these are normative economic statements

e. None of these are normative economic statements

 

b. The government should increase taxes to reduce income inequality

Calabresi and Melamed suggest which of the following?

a. When transaction costs are low, an injunction is more efficient than damages

b. When transaction costs are high, damages are more efficient than injunction

c. When transaction costs are low, damages are more efficient than injunction

d. Both A and B are true  

e. None of the above are true

d. Both A and B are true  

Which of the following describe the tradeoffs between laws that grant property rights based on first possession versus rules that grant property rights based on tied ownership?

a. Tied ownership rules have the advantage of being easy to administer but the disadvantage of encouraging preemptive investment in possessory acts

b. First possession rules have the advantage of being easy to administer but the disadvantage of discouraging preemptive investment in possessory acts.

c. First possession rules have the advantage of being easy to administer. But the disadvantage of encouraging preemptive investment in possessory acts.

d. A and B are both true

e. A and C are both true

c. First possession rules have the advantage of being easy to administer. But the disadvantage of encouraging preemptive investment in possessory acts.

Questions 37-40 refer to the following scenario: Suppose that two firms lease property above a shared natural gas deposit, and have the rights to mine the minerals below their leased land.  The gas in the deposit is worth $100.  Each company can choose to either drill fast, which costs $10, or drill slowly, which costs $5. First imagine that if one firm drills fast and the other drills slowly, the fast driller will get 75% of the gas, and the slow driller gets the remaining 25%.  If they both drill the same speed, they each get 50% of the gas. Which of the following payoff matrices describes the game?  

A	Firm 2
Firm 1		Slow	Fast
	Slow	45,45	20,65
	Fast	65,20	40,40

 

B	Firm 2
Firm 1		Slow	Fast
	Slow	45,45	65,20
	Fast	20,65	40,40

 

C	Firm 2
Firm 1		Slow	Fast
	Slow	40,40	20,65
	Fast	65,20	45,45

 

D	Firm 2
Firm 1		Slow	Fast
	Slow	45,45	20,65
	Fast	65,20	45,45

 

E: None of the above

A

Questions 37-40 refer to the following scenario: Suppose that two firms lease property above a shared natural gas deposit, and have the rights to mine the minerals below their leased land.  The gas in the deposit is worth $100.  Each company can choose to either drill fast, which costs $10, or drill slowly, which costs $5. What is the efficient outcome of the game described in Question 37?

a. (Slow, Fast)

b. (Slow, Slow)

c. (Fast, Slow)

d. (Fast, Fast)

e. B and D are both efficient

b. (Slow, Slow)

Questions 37-40 refer to the following scenario: Suppose that two firms lease property above a shared natural gas deposit, and have the rights to mine the minerals below their leased land.  The gas in the deposit is worth $100.  Each company can choose to either drill fast, which costs $10, or drill slowly, which costs $5. What is the Nash Equilibrium of the game described in Question 37?  (Listed as (Firm 1, Firm 2))

a. (Slow, Fast)

b. (Slow, Slow)

c. (Fast, Slow)

d. (Fast, Fast)

e. B and D are both Nash Equilibria

 

d. (Fast, Fast)

Questions 37-40 refer to the following scenario: Suppose that two firms lease property above a shared natural gas deposit, and have the rights to mine the minerals below their leased land.  The gas in the deposit is worth $100.  Each company can choose to either drill fast, which costs $10, or drill slowly, which costs $5. If Player 1 and Player 2 are somehow able to coordinate so that they play the efficient outcome of the game rather than the Nash Equilibrium, what type of improvement is this?

a. A Pareto improvement but not a Kaldor-Hicksimprovement

b. Both a Pareto improvement and a Kaldor-Hicksimprovement

c. A Kaldor-Hicks improvement but not a Pareto improvement

d. Neither a Pareto improvement nor a Kaldor-Hicksimprovement. 

e. The Nash Equilibrium is the efficient outcome of this game, so there are no improvements to be made.

b. Both a Pareto improvement and a Kaldor-Hicks improvement